We need new affordability checks on holiday lets
Jeff List (pictured), head of buy-to-let at Brightstar Financial
Holiday lets have been promoted as a good way for investors to achieve higher yields and potentially benefit from a preferable tax treatment compared to a standard buy-to-let investment as short-term lets are considered as a trading business. Consequently, we are seeing a lot of enquiries from clients who are considering investing in holiday lets, often portfolio landlords who are diversifying into this part of the market for the first time.
Lenders have responded to this increased demand with a growing number of specialist holiday let products. The defining characteristic of these products is that tenants are not required to sign an AST, and so they can be used for short-term lets without breaching the conditions of the mortgage.
However, most products do still require affordability to be assessed on the basis that the property is being let on an AST. This approach works for some, more standard, properties but it doesn’t take into account that a holiday let can potentially generate far more income in a 36-week period than a standard buy-to-let does over the course of a year.
So, clients who want to buy larger properties or places where there isn’t such a high demand for rental property can struggle to demonstrate affordability because the holiday let market and the rental property market are driven by completely different dynamics. There may not, for example, be much demand from tenants to live in a £2m eight-bedroomed stately home, but that type of property could attract a premium in the holiday lettings market, particularly if it was in a popular holiday area or near wedding venues. Similarly, a cottage in the Lake District or rural Dorset may not be in an area of high-demand amongst commuters but will be in demand with holiday makers.
Once a particular property has been let on a short-term basis for at least a year and there are accounts to evidence the income this can generate, some lenders are able to base affordability of this rather than letting it on an AST. But for the many properties that are being purchased by investors for holiday lets that have never been used for that purpose in the past, there is a fundamental gap in the market.
Lenders need to work more closely with valuers to establish a model that could be used to accurately value the potential income that could be generated by a holiday let, and to use this in their affordability calculations. Until this happens, the holiday lettings market will never be able to reach its full potential.